F/RAND : implementers sanctioned for gaming the system and failing to protect their costs position

The English Courts have become a popular forum for resolution of disputes over standard essential patents (SEPs) and, in particular, resolution of the terms of FRAND licences over such patents, whether that be on a national or worldwide basis. 

In this post we discuss the recent decisions of Henry Carr J following a technical trial in TQ Delta v ZyXEL, specifically how the judge approached injunctive relief and costs in advance of a RAND trial scheduled for later this year. 

Outcome of the technical trial

The technical trial concerned 2 of TQ Delta’s patents concerned with DSL technology. Henry Carr J found that one of the patents was valid and, because it was essential to the relevant standards, was infringed by ZyXEL. The other was held to be invalid for obviousness, but had it been valid, it would have been infringed.

At the hearing following judgment, the judge granted an injunction in favour of TQ Delta prohibiting the sale of the infringing products. ZyXEL was ordered to pay 60% of TQ Delta’s costs, the judge noting cryptically that ZyXEL had not made a “Calderbank offer”. We comment on both of these decisions below.

Injunction before RAND trial

The infringed patent will expire on 25 June 2019, which is before the terms of a licence will be resolved at the RAND trial. ZyXEL therefore argued that an injunction was disproportionate and should not be granted. Alternatively, ZyXEL asked for the injunction to be stayed or existing orders be “carved-out” of the injunction to enable ZyXEL to fulfil them.

The judge was unsympathetic to ZyXEL’s arguments and held that its behaviour was a clear case of “hold out”. ZyXEL had initially indicated that they would accept a licence on terms decided by the Court to be RAND, but when pressed became evasive. In the judge’s words, they had “blown hot and cold”. This strategy of hold-out meant that it would be unjust to deprive TQ Delta of the benefit of the injunction, even at this late stage of the patent term. Henry Carr J referred to the Court of Appeal’s judgment in Unwired Planet v Huawei, in which it was made clear that FRAND objectives were two sided : just as implementers need protection, so too do SEP owners. SEP owners must be able to prevent implementers from free-riding on their inventions. As TQ Delta put it, ZyXEL had “gamed the system” and the judge found it just to order an injunction against them, while the evidence presented of prejudice to ZyXEL or particular customers was inadequate to justify a carve-out. 

Henry Carr J refused permission to appeal, although both parties have applied to the Court of Appeal for leave to appeal, ZyXEL we understand on an expedited basis (an order was handed down on 8 April 2019, but is not yet public).

Costs payable now

In English litigation, the losing party will normally be ordered to pay the winning party’s reasonable and proportionate legal costs, to be assessed starting from the total costs incurred (not, for instance, scale fees depending on the value of the case). Assessment of costs can be time-consuming and complex, and so the losing party is often required to make an interim payment on account pending the final determination of the amount payable. In addition, the court will often consider settlement offers made during the case when deciding what costs should be paid. This is to encourage parties to reach a sensible settlement, and settlement offers can be used as a strategic part of the litigation.

Here, the judge considered that the overall winner of the case was TQ Delta, although the judge was prepared to reduce the proportion of costs payable in the light of some issues where ZyXEL had prevailed, meaning TQ Delta was entitled in principle to 68% of its costs. Henry Carr J found that there was no need to wait for the RAND trial: TQ Delta had obtained significant success already, irrespective of the outcome of the RAND trial.

ZyXEL argued that no payment on account should be ordered, in particular because the costs incurred were disproportionate in comparison with any damages or account of profits which might be ordered. However, the judge found no reason to postpone dealing with costs, noting that there was no “Calderbank offer”.

A Calderbank offer (which derives its name from a matrimonial case, Calderbank v Calderbank, decided by the Court of Appeal in 1975) is a settlement offer made “without prejudice save as to costs”, which means that it can be put to a judge when questions of costs are discussed (but not before then). If an offer is made but not accepted, and proves to have been a reasonable offer in the light of the final outcome, the judge has the discretion to increased, reduce or reverse the payment of costs. Indeed, the English Civil Procedure Rules even provide for a particular form of offer, a “Part 36” offer, where the costs consequences are mandatory and not discretionary, although in practice Calderbank offers still remain important.

Henry Carr J’s judgment acts as a reminder that, even in patent cases, parties should consider protecting their costs position by making settlement proposals by way of Calderbank or Part 36 offers. The same judge made a similar point in his decision in Stretchline v H&M in 2016, where he similarly refused to adjourn the assessment of costs until after the issue of damages had been resolved. If a defendant believes that damages are likely to be very small in comparison with costs, it can protect itself by making a an early offer to pay those damages. A claimant who refuses such an offer runs the risk of achieving a Pyrrhic victory: if he fails to be awarded a higher level of damages, he may have to pay the costs of the litigation despite winning the substantive case.

On quantum, ZyXEL argued that its legal costs were much lower than TQ Delta’s, and thus the judge should consider that TQ Delta’s costs were unreasonable and disproportionate, and the level of interim payment should therefore take account of that. However, one explanation for the difference in costs here was that a large portion of ZyXEL’s costs had been written off as a result of a pre-agreed fixed fee. As such, the judge did not draw any assumption from the disparity in costs and he ordered ZyXEL to pay TQ Delta 60% of the 68% of its costs payable relating to the technical trial on account.